Setting up a branch or subsidiary in Saudi Arabia: Guidance for UAE Based Companies

Introduction

A major decision that needs thought and planning is to expand a business into a new market. A successful business growth requires an understanding of the new target market's legal system and commercial environment.

Understanding the Business Environment in Saudi Arabia

The world's greatest oil producer is Saudi Arabia, which is situated on the Arabian Peninsula. The Islamic (Shari'a) legal system is the legal framework in Saudi Arabia, with some elements and references from French, Egyptian, and customary law. Saudi Arabia's economy is currently undergoing a transformation, as the Kingdom has unveiled the ambitious 2030 vision. This vision aims to enhance the non-profit sector's contribution to GDP, improve the business climate for small and medium enterprises, and increase non-oil revenue. Additionally, the government's ranking in several sectors is expected to be improved.

Legal and Regulatory Framework

Companies based in the UAE are looking to broaden their business reach into Saudi Arabia due to the similarity in legal frameworks between the two countries. The new KSA Companies Law 2022, which replaces the previous 2015 Companies law, has been approved by the Saudi Council of Ministers in Saudi Arabia. This new regulation is in line with the kingdom's vision of 2030, as it seeks to attract foreign investment, enhance flexibility, and bolster the private sector in the Kingdom. According to the new Companies Law of 2022 in Saudi Arabia, investors have the freedom to select from a range of Company Types. Here are some types of business entities: -

• General Partnership
• Limited Partnership
• Joint-stock company
• Simplified Joint Stock Companies
• Limited liability company

Settling disputes:

According to Article 153, apart from criminal acts, the company has the authority to resolve any disputes that may arise between shareholders or between the company and its president, manager, or any board members through arbitration or other alternative methods of resolution.

Employment Law:

The landscape of employment law in Saudi Arabia is undergoing rapid transformations, with a particular focus on Saudization laws that aim to reshape the labor market. As a result, companies are compelled to adapt their hiring strategies in order to comply with the evolving local regulations. In addition, it is important to ensure that the employment contract aligns with the employment law in Saudi Arabia. It is necessary for the contract to be issued in two (2) copies, ensuring that each party has a copy in their possession.

Advantages of Expanding to Saudi Arabia

• There are several compelling reasons for companies based in the UAE to consider expanding their business to Saudi Arabia. One of these reasons is the fact that Saudi Arabia's economy is experiencing growth, driven not only by oil but also by diversification into sectors like manufacturing, technology, and tourism.
• The Kingdom's 2030 Vision encompasses a comprehensive plan to decrease reliance on oil, foster private sector expansion, and improve the business climate. Additionally, Saudi Arabia's strategic location in the Middle East grants it access to important markets in the region, such as the Gulf Cooperation Council (GCC) nations, North Africa, and parts of Asia.
• Infrastructure development in Saudi Arabia is highly prioritized, with a focus on transportation, logistics, and telecommunications. This enables companies to operate with greater efficiency and effectiveness in the country.Saudi Arabia offers a wide range of industries, including construction, healthcare, renewable energy, and entertainment. This presents a potential opportunity for UAE-based companies to enhance their business and expand their operations.Lastly, Saudi Arabia shares a border with the UAE, making it convenient for companies in the UAE to conduct business in both countries at the same time.

Practical Considerations and Challenges

Expanding a business from UAE to Saudi Arabia may seem similar in terms of the business environment and legal framework. However, there are specific challenges that company owners need to be aware of: Expanding a business from UAE to Saudi Arabia may seem similar in terms of the business environment and legal framework. However, there are specific challenges that company owners need to be aware of:

Legal Requirements:

The sole method by which UAE companies can establish a presence in KSA is by establishing a branch or subsidiary company. The UAE company must have been in existence for a minimum of one year in order to qualify. The UAE corporation must prepare the following documents in order to establish a branch or subsidiary in KSA: 1. Trade License 2. Memorandum of Association 3. Financial Audit Report for the most recent fiscal year 4. Durable Power of Attorney The documents may differ marginally depending on the location of the UAE company's registration (i.e., mainland or free zone). The UAE Ministry of Foreign Affairs (MOFA) and the Saudi Embassy in the UAE must attest all of the aforementioned documents prior to their submission to the Kingdom of Saudi Arabia for further processing. Additionally, UAE companies should be cognizant of the fact that the registration process in KSA is more complex and time-consuming than in the UAE, where registration is conducted in a limited number of government departments.

•  Language and Communication:

Arabic serves as the official language of Saudi Arabia, and although English is commonly used in business environments, there may still be language obstacles, especially in more traditional sectors. Having bilingual staff or translators can greatly enhance communication.

• Cultural Awareness

Saudi Arabia is a Muslim nation that has inherited the Islamic heritage and culture. Islamic laws are being enforced within the Kingdom. This implies that the culture will be considerably different from that of Western countries, as the market may be extremely sensitive and stringent in terms of material content and branding. The company can enhance its market position and conduct successful business operations by comprehending local customs, traditions, and business decorum.

• Saudization

In 2011, Saudi Arabia's Ministry of Labour implemented a policy known as "Saudization." The primary objective of this initiative is to decrease the reliance on foreign labor within the country and to mandate that companies employ Saudi nationals. The policy mandates that companies adhere to specific quotas of Saudi employees, with the percentage of employees required to be fulfilled varying by industry.

• Regional Headquarters Program

Effective January 1st, 2024, the Ministry of Investments (MISA) has introduced the Regional Headquarters (RHQ) Programme. This initiative requires all government entities to exclusively engage with companies that have established their RHQ in Saudi Arabia, with only a few specific exemptions. This program seeks to attract multinational companies to establish their regional headquarters in the KSA.

Conclusion

There are compelling reasons for UAE companies to expand their businesses to KSA through the establishment of a branch, representative office, or subsidiary. Operating a business in Saudi Arabia can offer both promising prospects and obstacles for companies aiming to expand, much like the business landscape in the UAE. However, the process of setting up and timelines vary significantly. Working with legal experts who have a deep understanding of the legal requirements in both the UAE and Saudi Arabia is essential when it comes to setting up a business. With our help in CIG Saudi Arabia, and the advice of our legal experts, you can overcome these challenges and smoothly expand your UAE business to the Kingdom of Saudi Arabia.